A related party transaction is a contract or arrangement between a company and a person who is in a position to influence it, such as a director, KMP, their relatives, or a holding, subsidiary or associate company. Because these transactions carry a risk of conflict of interest, the law requires them to be approved by people who are not interested in them.

Up to three levels of approval can apply: the Audit Committee, the Board and the shareholders. This article explains when each applies and walks through the procedure, with the timeline for each step.

Which Approvals Apply

For listed companies, Schedule XII sets the following materiality thresholds:

Turnover is taken from the audited consolidated financial statements of the preceding financial year. The listed entity’s policy on materiality of RPTs is required to be updated for these thresholds.

Step-by-Step Procedure

Step 1: Identification and Classification of the Transaction – before approval
(Applicable to All Companies)
Sections 2(76) and 188 of the Companies Act, 2013; Regulation 23 of the SEBI (LODR) Regulations, 2015

• The counterparty is required to be checked against the list of related parties, which is updated from directors’ disclosures in Form MBP-1.
• The transaction is required to be classified as in or outside the ordinary course of business and at or not at arm’s length, and its value tested against the Rule 15(3) and Schedule XII thresholds.

Step 2: Audit Committee Approval – before entering into the transaction
(Applicable to Companies required to constitute an Audit Committee)
Section 177(4)(iv) of the Companies Act, 2013 read with Rule 6A; Regulation 23(2) and (3) of the SEBI (LODR) Regulations, 2015

• The Audit Committee is required to approve the transaction, based on the information required by the RPT Industry Standards for listed companies, including the nature of relationship, value, tenure, pricing, rationale and the percentage of turnover it represents. Interested members are required to recuse themselves.
• The Committee may grant omnibus approval for repetitive transactions in the ordinary course and at arm’s length, valid for up to one year, and is required to review transactions under it every quarter.
• A listed company’s Audit Committee may ratify, within 3 months or at its next meeting (whichever is earlier), a transaction of up to ₹1 crore entered into without its prior approval.

Step 3: Notice and Agenda for the Board Meeting – at least 7 days before the meeting
(Applicable to All Companies)
Section 173(3) of the Companies Act, 2013 read with SS-1

• Notice of the Board Meeting is required to be given in writing to every director at the address registered with the company, by hand, post or electronic means.
• The notice is required to be accompanied by the agenda, notes on agenda, draft resolutions and supporting papers for the related party transaction.
• The notes are required to disclose the name of the related party, the relationship, the nature, duration and value of the transaction, the manner of determining the price and any other information required under Rule 15(1).
• A meeting to transact urgent business may be called at shorter notice, provided at least one independent director (if any) is present. If none is present, the decisions are final only on ratification by at least one independent director.

Step 4: Board Approval – before entering into the transaction
(Applicable to All Companies)
Section 188(1) of the Companies Act, 2013 read with Rule 15(1) and (2)

• Where the transaction is not in the ordinary course of business or not at arm’s length, it is required to be approved by a resolution at a Board Meeting. A resolution by circulation is not permitted.
• A director interested in the transaction is required not to be present during the discussion. This bar does not apply to a private company that is not in default of filing its financial statements or annual return.
• The Board recommends the resolution to members where shareholder approval is required.

Step 5: Disclosure of Outcome to Stock Exchanges and Website – within 30 minutes of conclusion of the meeting
(Applicable in case of Listed Company)
Regulation 30(6) and 30(8) read with Schedule III of the SEBI (LODR) Regulations, 2015

• The outcome of the meeting, including any material related party transaction, is required to be disclosed to the stock exchanges within 30 minutes of the conclusion of the meeting, along with the time of commencement and conclusion of the meeting.
• If the meeting ends after trading hours but more than 3 hours before the next trading session starts, the disclosure is required within 3 hours of its conclusion.
• The same disclosure is required to be hosted on the company’s website simultaneously and retained there for at least 5 years (Regulation 30(8)).

Step 6: Minutes of the Board Meeting – draft within 15 days, signed within 30 days
(Applicable to All Companies)
Section 118 of the Companies Act, 2013 read with Paragraph 7 of SS-1

• Draft minutes are required to be circulated to all members of the Board within 15 days of the meeting. Members may give their comments within 7 days of receipt.
• Minutes are required to be entered in the Minutes Book within 30 days of the meeting and signed by the Chairman.
• A copy of the signed minutes is required to be circulated to all members within 15 days of signing.

Step 7: Notice of General Meeting to Members – at least 21 clear days before the meeting
(Applicable to All Companies)
Sections 101 and 102 of the Companies Act, 2013 read with Rule 18 of the Companies (Management and Administration) Rules, 2014 and SS-2

• Notice is required to be sent to every member, the legal representative of a deceased member, the assignee of an insolvent member, every director and the statutory auditors (and the secretarial auditor and debenture trustee, where applicable), by hand, post, courier or e-mail.
• Notice is required to be given at least 21 clear days before the meeting, excluding the day of sending and the day of the meeting, and placed on the company’s website, if any.
• An explanatory statement under Section 102 is required to be annexed, setting out the material facts, including the nature of concern or interest of directors, KMP and their relatives.
• The explanatory statement is required to state the name of the related party, the relationship, the interested directors or KMP, the nature, material terms and value of the transaction, and the particulars required under Rule 15(3) and the RPT Industry Standards.
• The meeting may be called at shorter notice with the consent of a majority in number of members entitled to vote who represent at least 95% of the paid-up share capital carrying voting rights.

Step 8: Submission of Notice to Stock Exchanges – within 12 hours of dispatch of notice
(Applicable in case of Listed Company)
Regulation 30 read with Para A, Part A of Schedule III of the SEBI (LODR) Regulations, 2015

The notice of the general meeting is required to be submitted to the stock exchanges and hosted on the company’s website simultaneously.

Step 9: Cut-off Date and Remote E-Voting – e-voting open for at least 3 days, closing at 5:00 p.m. on the day before the meeting
(Applicable to Listed Companies and Companies having 1,000 or more members)
Section 108 of the Companies Act, 2013 read with Rule 20 of the Companies (Management and Administration) Rules, 2014

• The cut-off date for determining voting eligibility is required to be not earlier than 7 days before the meeting.
• A scrutiniser is required to be appointed, after obtaining his or her consent, to scrutinise the e-voting and the voting at the meeting.
• Remote e-voting is required to remain open for at least 3 days and to close at 5:00 p.m. on the date preceding the meeting.

Step 10: Holding the General Meeting – on the date fixed
(Applicable to All Companies)
Sections 100, 103 and 108 of the Companies Act, 2013 read with SS-2

• The meeting is required to have the prescribed quorum present: for a public company, 5, 15 or 30 members personally present depending on whether the membership is up to 1,000, between 1,000 and 5,000, or more than 5,000; for a private company, 2 members.
• Members are required to approve the transaction by an ordinary resolution.
• No member who is a related party may vote on the resolution under Section 188 if the member is a related party to that transaction. For listed companies, no related party may vote, whether or not it is a party to the particular transaction (Regulation 23(4)).

Step 11: Proceedings, Scrutiniser’s Report and Voting Results – proceedings within 12 hours; voting results within 2 working days
(Applicable in case of Listed Company)
Regulations 30 and 44(3) of the SEBI (LODR) Regulations, 2015 read with Rule 20(4) of the Companies (Management and Administration) Rules, 2014

• A summary of the proceedings of the meeting is required to be submitted to the stock exchanges within 12 hours of its conclusion.
• The scrutiniser is required to submit a consolidated report of the votes cast to the Chairman, who declares the result.
• Voting results, along with the scrutiniser’s report, are required to be submitted to the stock exchanges within 2 working days of the conclusion of the meeting and hosted on the company’s website.

Step 12: Register of Contracts and Board’s Report – on entering into the contract; annually
(Applicable to All Companies)
Sections 134(3)(h), 188(2) and 189 of the Companies Act, 2013 read with Rule 8(2) of the Companies (Accounts) Rules, 2014

• The contract is required to be entered in the register of contracts in Form MBP-4.
• Every Section 188 contract is required to be referred to in the Board’s report, with the justification, in Form AOC-2.

Step 13: Half-yearly Disclosure of RPTs – within 15 days of publication of half-yearly results
(Applicable in case of Listed Company)
Regulation 23(9) of the SEBI (LODR) Regulations, 2015

A listed company is required to file disclosures of RPTs with the stock exchanges in the format specified by SEBI, on a consolidated basis, every six months, and publish them on its website.

Transactions entered into without approval. A contract entered into without the required Board or shareholder approval may be ratified within 3 months; otherwise it is voidable at the option of the Board or shareholders, and the director concerned is required to indemnify the company for any loss (Section 188(3)).

Penalties for Non-Compliance

Related Party Transactions at a Glance

Day 0 = Date of entering into the transaction